So, you've decided that it's time to start your own business - that you no longer wish to work for "the man" as they say. You have your product or idea, you have your goals and objectives outlined in the form of a working business plan, you've formed your company legally with the state you plan to operate in, you’ve obtained your Federal Tax ID number and now you’re all ready to roll. But wait, we have forgotten one all important step in the process. The most important step perhaps. How do you obtain the loan (startup capital) to get the business off the ground? This step is arguably the toughest task of all for any new startup business. Why? Let's explore.

It's first important to note that most lenders, including banks as a whole, view startup business loans similarly to unsecured personal loans - very risky. Tim Carroll, Vice President for Deluxe Corporation, a company that helps small businesses with marketing, estimates that generally 50 to 70 percent of new startup businesses fail within the first 18 months. Certainly an alarming rate, yet it sheds light on why lenders tend to shy away from making a loan of any size to a new business.

So where does one turn to obtain such capital to kick start their business into existence?

You may start by considering dipping into your own personal savings from what you previously earned in your former line of work. Other resources could be personal credit cards, a loan from a family member or friend, or perhaps a loan secured by your most valuable personal asset, your home. Truth is, in my experience as a business banker, the sources listed above may be your best initial line of attack when looking to secure capital for your new business.

Now, if by chance you are not having any luck with obtaining startup capital from any of the sources mentioned above, it then becomes time to look elsewhere. Start with your local bank, but you should know, as mentioned above, most banks are somewhat conservative in their lending decisions when it comes to startup businesses. If the bank does express interest in funding your startup request, it's often typical that they will ask you to pledge collateral acceptable to them to secure the loan.

You may also want to look into an SBA (Small Business Administration) loan. The qualifications for an SBA loan are specific, although their programs are varied. The SBA will typically facilitate the loan for you with a third party lender, such as an SBA preferred bank.

A third option to look into is an angel investor. Such investors are typically affluent individuals who provide capital for a business startup in exchange for partial ownership in your company. It should be noted that while an angel investor is helpful in obtaining the startup capital you require to get your business off the ground, the risk you need to consider is in giving up ownership in the company and oftentimes the say to do as you please when making future business decisions. Proper research and careful review of the angel investor you go into business with is strongly encouraged.

So there you have it, some resources, but not all, to consider when looking for working capital to start your new business. Keep this in mind, Mark Zuckerberg of Facebook had to start somewhere and according to Forbes.com, as of March 2013, he's worth a cool $13.3 billion dollars at the ripe age of 29. Maybe you can ask him to fund your new startup? I suggest you start with a simple friend request.

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Throughout the year, I find myself sitting with business owners and sales folks, forming relationships, making introductions, giving and receiving qualified and unqualified referrals and sharing new ideas. All of these activities are typical of your run of the mill business networking groups that we find ourselves in around our local market areas. Having said that, let’s address one activity I mentioned above; the giving and receiving of referrals. Assuming you sit in on a networking group, have you ever really thought about why a fellow member would refer you or your business to a friend? Or why you would refer your colleague to someone in your network? I have narrowed it down to two things:

1) How often do you "give" refferals to others?

2) What level of trust do your colleagues have in you, and you in them?

Let's first start by addressing the word “give” in the context it’s used in business networking groups. Think about it - if each of us networked to “get” something, then more than likely, none of us would “get” anything. Therefore, it makes sense to approach your networking group and meetings with the idea of “giving” as many referrals as possible, increasing the likelihood that you will be “given” referrals in kind. When you show you care about others enough to help them grow their business, you will find that others consider the same holds true for you. Albert Einstein once said, “The value of a man resides in what he gives and not in what he is capable of receiving.”

So, now that we’ve covered giving and receiving referrals, let’s discuss the word “trust” and how it applies to the world of networking. As in our own personal relationships, trust in the workplace is the main building block for creating ongoing and long-lasting relationships. Trust is built over time and is almost always earned - not given. Trust is built simply through acceptance, integrity and reliability. It’s with this behavior that people will trust you, and therefore, refer you to others. Other qualities require that you be genuinely interested in others, listen properly, and follow up accordingly. In the end, building trust is ESSENTIAL for growing and maintaining a strong business network.

In closing, as you continue to build your relationships and your network, remind yourself that “what goes around comes around.” In order to get, you MUST give. Also, your reputation is everything. It’s always much easier for people to lose trust in you than it is to earn it. Happy networking!

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So, you’re trying to line up financing for that luxury car you’ve always wanted; or that new addition on the house your wife has been “gently” reminding you of; or how about the new sports boat to take the kids water skiing every other weekend? Well, in order to make any of these things happen, most of us turn to our friendly local bank to inquire about a loan to turn our dreams into a reality. Your average banker will often tell you that yes, they finance such requests as those mentioned above. All you have to do is fill out an application, then he or she will run your credit report and take a look at your DTI. This is where you stop and think to yourself, “I know what a credit score is, but what is this DTI they are referring to?”

What it is:

DTI stands for debt to income ratio. Okay, so what is debt to income ratio? Debt to income ratio is a personal finance measurement that compares the amount of money you earn to the amount of money you owe your creditors. Banks and lenders calculate how much debt their customers can take on before they may start having financial difficulties. The banks and lenders then use these calculations to set lending amounts before approving any new debt the customer is looking to take on. Preferred maximum debt to income ratios will vary from lender to lender, but you can count on a figure somewhere between 36% and 40% as the norm maximum debt to income ratio.

How to calculate it:

To calculate debt to income ratio, first add up all the payments you make each month to service your debt. Such debt often includes your housing expense (mortgage or rent), credit card payments, car loans, and other debts such as student loans, investment loans, etc. Next, divide your total monthly debt by your gross income per month (before taxes), then multiply that number by 100 to get your debt to income ratio as a percentage.

Example:

If you make $54,000 a year, your monthly gross income is $54,000 divided by 12 months for a total of $4,500 per month.

Therefore, your debt to income ratio is $2,000 (outstanding monthly debt payments) divided by $4,500 (monthly income), which works out to about .44 (x 100) you get a 44% debt to income ratio.

In this example, a 44% debt to income ratio, by most bank standards, will be considered high; therefore, if this was your situation, you might be declined for a new loan request. In some cases, however, an approval may be granted, but that approval may come at a cost in which you would be asked to pay a higher than market interest rate for your new loan.

So there you have it - a brief insight of what your banker is referring to when he mentions your DTI ratio. It should be noted that by keeping your debt to income ratio low, you can be assured that you can financially handle the debt you have already taken on, and most likely qualify for future credit. Carefully manage that debt and before you know it, you’ll have that new car, home addition or boat you’ve always wanted!

To easily monitor your debt to income ratio, try Mariner360, our free personal management tool that allows you to aggregate all of your accounts so you can see everything in one place.

Be sure to leave a comment below to let us know if you have any further questions about debt to income ratios or if you would like to hear more about this and similar topics.

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